Sept. 19 (Bloomberg) -- China must move beyond the “deep
wounds” caused by Japan during World War II in addressing
present-day issues such as the dispute over contested islands in
the East China Sea, U.S. Defense Secretary Leon Panetta said.

Panetta, speaking to military cadets in Beijing today after
meeting with Vice President Xi Jinping, also said that the U.S.
had urged its Japanese allies to resolve territorial issues with
China peacefully.

“I understand the deep wounds that China suffered during
World War II and nobody understands those wounds better than the
U.S., because the U.S. also suffered deep wounds” during the
conflict, Panetta said. “At the same time we can’t live in the
past, we must live in the future.”

The standoff over control of the islands, known as Diaoyu
in Chinese and Senkaku in Japanese, has sparked the worst
bilateral crisis since 2005, endangering a trade relationship
that has tripled in the past decade to more than $340 billion.
It also comes ahead of a once-a-decade leadership change this
year in China that has already been clouded by a recent two-week
absence by Xi Jinping, who is in line to be president, and the
ouster of Politburo member Bo Xilai.

More than a hundred police stood watch today over streets
free of protesters outside the Japanese embassy in Beijing.
Thousands of people yesterday waved flags and brandished
portraits of Mao Zedong in demonstrations at the embassy as well
as at the Japanese consulate in Shanghai.

‘Keep Walking’

The road in front of the Japanese embassy in the capital
was reopened to traffic today after having been shut since at
least Sept. 15 because of protests. Military police wearing
helmets stood guarding the embassy gates and policemen standing
on the sidewalk instructed those passing by to “keep walking
along.”

“They do not want things to get out of control,” Joseph
Cheng, a political science professor at the City University of
Hong Kong, said yesterday. “There will be more attempts to
contain the protests.”

Panetta said the Japan-U.S. alliance shouldn’t be viewed by
China as American support for the Japanese point of view on the
island dispute, likening the U.S. stance to its alliance with
Israel.

“We’ve made clear to Israel that it’s not the right time
to strike Iran,” he said. “We have made it clear to Japan’s
leaders that they’ve a responsibility to resolve this dispute
peacefully.”

Chinese Foreign Ministry Spokesman Hong Lei said at a
regular briefing in Beijing today that the U.S. should
“maintain its neutrality” in the island dispute.

Ambassador’s Car

Demonstrators in the capital yesterday caused minor damage
to the official vehicle of U.S. Ambassador Gary Locke as it was
about to enter the embassy grounds, spokesman Nolan Barkhouse
said today. Some of the people had Chinese flags and looked to
be leaving protests taking place at the nearby Japanese embassy,
said a U.S. official who wasn’t authorized to speak publicly on
the matter. Locke was in the car at the time, the official said.

Japanese retailers in China have closed their doors and
covered up their logos as protests spread to dozens of cities.
The tensions complicate efforts to fortify growth in each
country as Europe’s debt crisis saps demand for exports.

At the Japanese embassy in Beijing yesterday, protesters
threw bottles and branches at the building’s walls, which were
spattered with eggs and paint. In Shanghai, protesters marched
through the streets waving Chinese flags and shouting slogans
saying “Down With the Japanese.”

The recent demonstrations escalated after Japan last week
purchased the islands from a private Japanese owner. The islands
have been under Japanese administrative control since 1895.

Keep Cool

“Sino-Japan relations are often described as hot in trade
but cold in politics, but now even the trade relationship is
getting cold,” said Zhang Jifeng, a researcher with the
Institute of Japanese Studies at the Chinese Academy of Social
Sciences in Beijing. “It’s hard to tell which side would suffer
more from the cooling trade, but it’s sure that the pain will be
deep for both.”

Toyota Motor Corp., Sony Corp. and Fast Retailing Co. were
among companies that halted operations in China after protesters
attacked Japanese cars and shops.

“If our relationship remains strained for a long period,
it will be harmful not only to our two countries but to the
region and the world economy,” Japanese Prime Minister
Yoshihiko Noda said on TBS Television. “We should keep a cool
head, but take a firm line. It is important to at least talk,
exchange information and communicate.”

Boats Sail

Japan “totally caused” the current crisis and should
“take responsibility,” Chinese Defense Minister Liang Guanglie
told reporters in Beijing yesterday in a joint appearance with
Panetta. “We will very closely watch the evolution with regards
to this dispute and we reserve the right for further actions.”

A Chinese fishing ban in waters surrounding the islands
ended Sept. 16, and Chinese and Japanese media aired footage of
fishing vessels heading out to sea. The state-run China News
Service reported on Sept. 17 that 1,000 fishing boats typically
go to the region and the government would send more vessels than
in recent years. Hong Kong-based activists may go to the region
as early as today, the Apple Daily newspaper reported.

Xi met with Panetta at the Great Hall of the People in
Beijing today, his first announced appearance with a foreign
visitor after being absent in public for about two weeks.

Panetta and Xi met in a ceremonial room at the Great Hall,
which overlooks Tiananmen Square and is used for hosting state
visits and for sessions of China’s legislature. Wearing a dark
blue suit and a light blue tie, Xi appeared healthy and shook
hands with Panetta before greeting other U.S. officials.